-- We are affirming our ratings on Central Maine Power Co. (CMP), New
York State Electric & Gas Corp. (NYSEG), and Rochester Gas & Electric Corp.
(RG&E) based on the company's efforts to strengthen ring-fencing provisions.
We are removing the ratings from CreditWatch with negative implications. The
outlook is negative.
-- The affirmation follows today's downgrade of ultimate parent Iberdrola
S.A. and Iberdrola USA to 'BBB' from 'BBB+'. The downgrade reflects that,
despite Iberdrola's strategic focus on debt reduction, we believe that the
group's improvement in credit ratios could be constrained by potential delays
in tariff deficit securitization and the difficult macroeconomic and business
environment in its key markets. The outlook is stable.
-- CMP, NYSEG, and RG&E have all made filings with their respective
public service commissions that seek enhancements to the current ring-fencing
provisions, including the establishment of a minimum equity ratio tied to the
ratemaking capital structure that would prevent dividends to the parent below
-- The negative outlook reflects a one in three chance that we could
lower the ratings on RG&E if the company is unable to strengthen the current
On Nov. 28, Standard & Poor's Rating Services affirmed its ratings on RG&E,
including the 'BBB+' corporate credit rating, the 'A' senior secured issue
rating, and 'BBB+' senior unsecured issue ratings and removed the ratings from
CreditWatch with negative implications where they had been placed on Oct. 15,
2012. The outlook is negative.
The rating action follows the downgrade on ultimate parent Iberdrola S.A. to
'BBB' from 'BBB+' and the removal of the rating from CreditWatch with negative
implications on Nov. 28. We regard the U.S. utilities, which include CMP,
NYSEG, and RG&E, as effectively under Iberdrola S.A.'s direct control, and
none individually is a significant source of cash flow for the holding
company. Our ratings on CMP, NYSEG, and RG&E therefore do not reflect
significant support from Iberdrola S.A., but, without additional enhancement
of the ring-fencing provisions, they are effectively capped at the rating on
The U.S. utilities do not currently have sufficient ring-fencing measures in
place to separate the ratings from the parent. Iberdrola USA is currently
working with both the New York Public Service Commission (NYPSC) and Maine
Public Utilities Commission (MPUC) to add additional insulation measures at
CMP, NYSEG, and RG&E. In September 2012, the company filed with the NYPSC a
supplement to the pending internal reorganization petition, which seeks
enhancement to the current ring-fencing provisions, including the
establishment of a minimum equity ratio tied to the ratemaking capital
structure that would prevent dividends to the parent below that level. In
October, the company filed with the MPUC a petition to amend the minimum
common equity ratio in its 2008 merger order in Maine. The company expects to
have these measures in place in the first quarter of 2013. If the companies
are able to put ring-fencing measures in place to sufficiently insulate them
from the parent company, they would be able to achieve ratings separation and
avoid a downgrade strictly because of the downgrade at the parent company.
Absent any additional insulation provisions, the utility ratings would be
lowered to that of the parent and continue to be capped at the parent ratings.
The downgrade of Iberdrola reflects our view that, despite its strong emphasis
on improving credit quality, Iberdrola's strategic plan for 2012-2014 could
fail to improve credit ratios to levels commensurate with the 'BBB+' rating,
including Standard & Poor's-adjusted funds from operations (FFO) to debt of
more than 20%. We believe that management is committed to reducing debt by EUR6
billion by 2014 through a combination of lower capital investments, asset
disposals, tariff deficit securitization repayments, and positive free cash
flows in all businesses. Nevertheless, our projections of flat EBITDA over
2012-2014 due to the tough fiscal and economic environment in Spain, as well
as potential delays in the receipt of EUR3 billion of past tariff deficit
receivables, lead us to expect that Iberdrola will sustain adjusted FFO to
debt of about 18%.
We consider that Iberdrola has taken actions to reduce its exposure to Spanish
country risk, which we now see as "moderate". The stable outlook reflects our
expectation that Iberdrola will maintain ratios in line with the rating.
Furthermore, if we downgrade Spain by one notch, the rating on Iberdrola would
not be affected, given our view of its only "moderate" country risk exposure.
Standard & Poor's bases its ratings on electric utilities CMP, NYSEG, and RG&E
on each company's stand-alone credit profile because their ultimate parent
company, Spanish utility holding company Iberdrola S.A. (BBB/Stable/A-2), has
assumed the debt of NYSEG's parent company, Iberdrola USA (BBB/Stable/A-2). We
regard the U.S. utilities as effectively under Iberdrola S.A.'s direct
control, and none individually is a significant source of cash flow for the
holding company. Our ratings on the utilities, therefore, do not reflect
significant support from Iberdrola S.A., but without sufficient ring-fencing
measures, they are effectively capped at the rating on the parent.
Our ratings on RG&E reflect an "excellent" business risk profile under our
criteria. The profile benefits from the utility's low-operating-risk
transmission and distribution (T&D) business strategy. The company's financial
risk profile is "aggressive" in our assessment, and while it has improved, a
sizable capital spending program could cause pressure. RG&E is primarily an
integrated electric and gas transmission and distribution utility and has
approximately 367,000 electric and 303,000 natural gas customers in the
Rochester, N.Y., area. RG&E operates under regulatory agreements that provide
for full and timely recovery of purchased electricity and gas costs, stranded
costs, and authorized returns that have been in line with industry averages.
While Standard & Poor's views the regulatory environment in New York as less
credit supportive than in some states, RG&E has been able to reach a
constructive multiyear settlement in its rate case filing, reducing the need
for regular rate filings and ensuring cash flow stability. RG&E is currently
operating under a three-year settlement effective through Dec. 31, 2013. The
multiyear settlement, which includes several credit-enhancing recovery
mechanisms, is essentially favorable for RG&E's credit quality because it
should help it maintain cash flow stability.
RG&E's financial risk profile is aggressive. As of June 30, 2012, RG&E
generated $208 million in adjusted funds from operations (FFO) and had total
adjusted debt of $871 million. For the same period, adjusted total debt to
total capital was about 55%, adjusted total debt to EBITDA was 4.1x, and
adjusted FFO to total debt was 24%. The credit metrics reflect the
off-balance-sheet debt imputation of about $89 million resulting from a
shortfall in pension and other postretirement liability funding. While the
financial profile should benefit from the approved and proposed rate
increases, the large capital spending program and need for external financing
will place some pressure on the credit protection measures, necessitating a
balanced funding approach.
Liquidity is adequate under Standard & Poor's corporate liquidity methodology,
which categorizes liquidity in five standard descriptors. Adequate liquidity
supports our 'BBB+' issuer credit rating on RG&E. The company's projected
sources of liquidity, mostly operating cash flow and available bank lines,
exceed its projected uses, mainly necessary capital expenditures and debt
maturities, by more than 1.2x. RG&E's ability to absorb high-impact,
low-probability events with a limited need for refinancing, its flexibility to
lower capital spending or sell assets, its sound bank relationships, its solid
standing in credit markets, and its generally prudent risk management further
support our assessment of its liquidity as adequate.
RG&E has no maturities in the next 12 months. Iberdrola USA manages RG&E's
liquidity, and each of the U.S. operating utilities is a joint borrower in a
$600 million utility-only credit facility maturing in 2016 with about $527
million currently available.
We base our assessment of RG&E's liquidity on the following factors and
-- We expect the company's liquidity sources (including FFO and credit
facility availability) over the next 12 months to exceed its uses by more than
-- Debt maturities over the next year are manageable.
-- Even if EBITDA decreases by 15%, we believe net sources will be well
in excess of liquidity requirements.
-- The company has good relationships with its banks, in our assessment,
and has a good standing in the credit markets.
In our analysis, based on information available as of Sept. 30, 2012, we
assumed liquidity of about $340 million over the next 12 months, consisting of
projected FFO and availability under the credit facility. We estimate the
company could use up to $235 million during the same period for capital
spending and working capital. RG&E's credit agreement includes a financial
covenant limiting the consolidated debt-to-capitalization ratio, with which
the company was complying as of Sept. 30, 2012.
We assign recovery ratings to first mortgage bonds (FMBs) issued by
investment-grade U.S. utilities, which can result in issue ratings that are
notched above a corporate credit rating on a utility depending on the category
and the extent of the collateral coverage. We base the investment-grade FMB
recovery methodology on the ample historical record of 100% recovery for
secured bondholders in utility bankruptcies and on our view that the factors
that supported those recoveries (limited size of the creditor class and the
durable value of utility rate-based assets during and after a reorganization,
given the essential service provided and the high replacement cost) will
persist. Under our recovery criteria, when assigning issue ratings to utility
FMBs, we consider our calculation of the maximum amount of FMB issuance under
the utility's indenture or other legally binding limitations relative to our
estimate of the value of the collateral pledged to bondholders and
management's stated intentions on future FMB issuance, as well as any
regulatory limitations on bond issuance. FMB ratings can exceed a corporate
credit rating on a utility by up to one notch in the 'A' category, two notches
in the 'BBB' category, and three notches in speculative-grade categories.
RG&E's FMBs benefit from a first-priority lien on substantially all of the
utility's real property owned or subsequently acquired. Collateral coverage of
more than 1.5x supports a recovery rating of '1+', reflecting our expectation
for 100% recovery in the event of default, and an issue rating two notches
above the corporate credit rating.
The negative outlook reflects the one-in-three chance that we will lower the
ratings on CMP if the company is unable to put sufficient ring-fencing
measures in place to separate the ratings from parent Iberdrola S.A. If the
company is unable to put sufficient ring-fencing measures in place at the U.S.
utilities, we will lower the ratings to that of the parent company. Our
baseline forecast shows adjusted FFO to total debt averaging about 20% and
adjusted debt leverage below 50% over the near to intermediate term. We will
revise the outlook to stable if the company is able to achieve its plan of
strengthening the current ring-fencing measures in place. Based on the lower
rating of the parent company and the negative outlook, we would not consider a
higher rating at this time.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- General Criteria: Nonsovereign Ratings That Exceed EMU Sovereign
Ratings: Methodology And Assumptions, June 14, 2011
-- 2008 Corporate Ratings Criteria: Ratios And Adjustments, April 15,
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Methodology: Differentiating The Issuer Credit Ratings Of A Regulated
Utility Subsidiary And Its Parent, March 11, 2010
-- Credit FAQ: What's Behind Our Rating Actions On Spanish Power
Utilities?, April 4, 2012
Ratings Affirmed; Outlook Negative
Rochester Gas & Electric Corp.
Corporate Credit Rating BBB+/Negative/-- BBB+/Watch
Rochester Gas & Electric Corp.
Senior Secured A A/Watch Neg
Recovery Rating 1+ 1+